What and how?
Mercaton Group is positioning itself as a later-stage fund with a focus on special situations projects that have lower valuations at entry which translates into higher upside potential (with additional risks with a defined strategy to mitigate them).
Why?
VC Funds types
VC funds come in various types, each with a specific focus or strategy tailored to different stages of a company’s lifecycle, industries, geographies, or other investment criteria. Primary types of venture capital funds divided by target development stage include:
Seed funds focus on the earliest stage of a startup's lifecycle, providing capital for developing ideas, building prototypes, and achieving product-market fit. Investment sizes are typically small, ranging from a few thousand to a few million dollars. The risk level is high, as these startups are often pre-revenue and may not have a fully developed product.
Early-Stage Funds invest in startups that have progressed beyond the seed stage but are still in the early growth phase, often during Series A and sometimes Series B rounds. The investment size is larger than seed funds, typically ranging from $2 million to $15 million. The risk level remains high, though these companies usually have a product and some market traction.
Growth Equity Funds focus on investing in mature companies with established business models that seek capital for rapid scaling, typically during Series C and beyond. Investment sizes range from tens to hundreds of millions of dollars. The risk level is lower than seed or early-stage investments, as these companies usually have proven revenue streams and market presence.
Target returns
Start-Up Firms: the typical loss rate for early-stage investments is 65% (i.e., two-thirds return less than the initial outlay). This means that 35% must generate gains much greater than 1x to achieve an acceptable overall result. The average holding period of a VC investment is eight years. All that implies that to achieve 25% IRR for investors Early Stage Funds seek 6x invested capital what means that average return on successful project needs to be at 10x-12x (assuming reinvestments).
Later-Stage Companies: the loss rate for later-stage companies is less than 30%, in contrast to the 65% number for early-stage counterparts. By the same token, average holding periods are shorter – six years, on average. This means that in order to realise the planned IRR of 20%, the fund must achieve a return of 3x. To achieve such a result, successful projects must achieve an average return of min. 4x (without reinvestment due to the shorter period than in the early stage).